US stocks tumbled 3 per cent on Wednesday in the market's worst day since mid-August as a spike in Italian bond yields signaled the European debt crisis had worsened.
All 10 S&P sectors were down, but S&P financials were the hardest hit on worries about European exposure, dropping 5.4 per cent.
US stock markets have grown more chaotic in response to rising volatility in European debt markets, and investors have trouble keeping up with a steady stream of headlines and pricing in how the crisis might play out.
"The market has turned into a derivative of what happens in Europe now," said Craig Hodges, president of Hodges Capital Management in Dallas, Texas.
The Dow Jones industrial average was down 389.24 points, or 3.20 per cent, at 11,780.94. The Standard & Poor's 500 Index was down 46.82 points, or 3.67 per cent, at 1229.10. The Nasdaq Composite Index was down 105.84 points, or 3.88 per cent, at 2621.65.
Dominating market moves are "day traders and people trying to capture and skim fractions of decimals off stocks," Hodges said.
Locally, the Australian share market is set to open sharply lower, following US and Europe market plunges due to delays in Europe's moves to stem its debt crisis. The December share price index futures contract was 105 points lower at 4232, indicating a fall of 2.4 per cent.
Yesterday, the benchmark S&P/ASX200 index gained 52.3 points, or 1.22 per cent, to 4346.1, while the broader All Ordinaries index added 49.4 points, or 1.14 per cent, to 4406.2.
The spread of the crisis to Italy has lifted it to a new level. European Union sources said German and French officials were discussing drastic plans, including an overhaul that would possibly create a smaller euro zone.
Italy's bond yields shot up to 7.502 per cent, a new high since the euro was introduced in 1999. Investors were forced to sell Italian bonds after a European clearing house increased the collateral needed to borrow against that debt.
The 7 per cent level was the point where European nations, including Ireland and Portugal, had to seek bailouts as their financing costs ballooned.
General Motors slid 10.9 per cent to $US22.31 after the automaker said it would not break even for the year in Europe, as it had forecast, due to deteriorating conditions in the region.
The S&P 500 saw its worst daily per centage drop since Aug. 18.
Prime Minister Silvio Berlusconi's insistence on elections instead of an interim government raised concerns of prolonged instability and delays to economic reform.
Italy has replaced Greece at the center of the euro zone debt crisis and is seen teetering on the cusp of requiring a bailout. A deal on forming a Greek national unity government collapsed while economic turmoil continued.
Reflecting growing market anxiety, the CBOE Volatility Index VIX jumped 31.6 per cent, its biggest daily per centage gain since mid-August. The index usually moves inversely to the S&P 500 as traders use it as a hedge against falling stocks.
"Italian bonds are essentially serving as another fear index like the VIX, and right now they're reflecting a lot of fear," said Charles Reinhard, deputy chief investment officer at Morgan Stanley Smith Barney in New York. Among bank stocks, Morgan Stanley fell 9 per cent to $US15.76. Goldman Sachs Group Inc dropped 8.2 per cent to $US99.67. Bank of America Corp lost 5.7 per cent to $US6.16.
After the closing bell, shares of Cisco Systems rose 2.2 per cent to $US18 after it reported earnings that beat expectations.
During the session, volume was about 8.65 billion shares on the New York Stock Exchange, the American Stock Exchange and Nasdaq, just above last year's daily average of 8.47 billion.
Decliners outnumbered advancers on the NYSE by a ratio of about 9 to 1 and on the Nasdaq by roughly 11 to 2.
Reuters